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China’s Music Scene Is Booming, But Labels Risk Getting Left Behind

(Bloomberg) -- Don Diablo doesn’t want record labels messing up his business in China.

The world’s No. 7 DJ considers the market one of his three biggest, alongside the U.S. and Europe. He tours there six or seven times a year, and in 2018 scored his first major Chinese endorsement deal with Budweiser.

In the old days, a musician would welcome the support of a record label as he took on such a big opportunity. But China’s gold rush of a music scene isn’t following the usual rules. Diablo is relying instead on NetEase Inc., one of the country’s two largest audio streaming companies. In recent negotiations with record labels, he has asked them to carve China out of deals for his songs, which include hits like “You’re Not Alone” and “Heaven to Me.”

Diablo is one of a growing number of artists striking direct deals with Chinese streaming services, upending decades of record-industry orthodoxy. Musicians are supposed to sign with a record label because the company has offices and connections all over the world. But acts like Diablo and Far East Movement, a Los Angeles hip-hop group best known for the song “Like a G6,” have decided they are better off on their own in China.

“The folks at NetEase have done a fantastic job super-serving the dance market,” Diablo’s manager, Andrew Goldstone, said in an interview. That includes marketing and promotions, he said. The DJ also works with Tencent Music Entertainment Group, which owns the other top streaming services in China.

Not everyone is happy about this new world order. Western record labels are in an awkward position because Tencent Music and NetEase are supposed to be their partners. Instead, the companies are competing with them for artists, a move that could jeopardize their share of one of the world’s fastest-growing music markets.

Streaming has transformed a haven for song piracy into one of the 10 biggest markets. Sales in China nearly tripled in three years, climbing to $292 million in 2017 from $105.2 million in 2014.

Record labels have rushed to cash in, granting Tencent exclusive rights to represent their music in the country, and pursuing deals with local acts. Sony Music created an electronic-dance music label with DJ Alan Walker, while Warner Music Group acquired Gold Typhoon Group’s catalog of recordings from Taiwan, mainland China and Hong Kong. Vivendi SA’s Universal Music has touted signings with the pianist Lang Lang and Chinese-Canadian pop star Kris Wu.

“This market could be a global phenomenon,” said Alex Taggart, who runs the international division of Outdustry, a music-industry services company that specializes in China. “It could be bigger than Korea, bigger than the whole K-pop phenomenon.”

That's if the industry plays its cards right. But the market in China bears little resemblance to the U.S., Europe and Japan, or even Korea. Many established pop stars already run their own businesses, and the major Western labels wield less influence.

Local Chinese music accounts for about 80 percent of listening on Tencent’s three services, QQ Music, KuGou and Kuwo. Though international music grabs a larger share of listening on NetEase, which appeals to a younger, more urban audience, Chinese acts still claim the biggest share.

“Artists, especially at the beginning of their careers, may be tempted by big money.”

In the absence of major record labels, the services have proven they have the power to make or break a song by promoting it within their apps. Over the past year, they have expanded their efforts to build direct ties with artists. They have funds to sign a wider range of acts, including acts already on labels’ rosters.

Tencent Music and NetEase have offered acts anywhere from a few thousand dollars to millions of dollars if the musicians work directly with them instead of through a record label.

Tencent Music declined to comment. NetEase said it is “devoted to helping independent musicians in China publish their works and gain more attention by providing support in every way possible,” but declined to comment on its payments.

The money on offer has shocked label executives, who say they don’t have the same resources. Tencent Music just listed shares on the New York Stock Exchange and is supported by Tencent Holdings Ltd., a Chinese Internet giant worth more than $400 billion. NetEase, though not as large as Tencent, is still worth more than any of the major record labels.

Labels say they can offer artists better services and more attention, especially for those looking to appeal to audiences around the world — and not just China.

“Artists, especially at the beginning of their careers, may be tempted by big money,” Andy Ma, the head of Warner Music Group’s China business, said in an interview.

All the streaming services — including Spotify Technology SA and NetEase — claim they aren’t creating labels. They are supporting thousands of artists who wouldn’t have gotten a deal otherwise, or providing services to artists who have the resources to operate their own labels.

Direct deals between streaming services and artists in China set a dangerous precedent for labels elsewhere. Spotify and Apple Music, the two biggest services everywhere else, have been dabbling in direct deals with artists, much to the labels’ chagrin.

Diablo operates his own record label and hired Dutch dance-music consultant Sarah Hildering to run it. The business used to be aligned with Spinnin’ Records, owned by Warner Music. He still works with labels releasing certain tracks, but he mostly prefers to go it alone.